Sunday, 21 September 2008

Mortgage fraud rampant

Bradford & Bingley was stung by a £15m mortgage fraud centred on newly built properties in Surrey, Hampshire and East Sussex. Hundreds of buy-to-let mortgage applications were submitted by a single gang between 2004 and 2007 from fake borrowers and dishonest appraisers.

A source close to the bank said its executives were horrified to learn of the fraud at the beginning of this year. 'It was well organised and involved a large number of people. The scam involved newly-built estates and multiple applications for mortgages from "straw borrowers". The gang worked with solicitors, surveyors and estate agents who knew exactly what was going on. It slipped through at a time when staff were still being encouraged to sign off buy-to-let mortgages.

It is certainly more widespread than any bank will ever acknowledge. According to the Council of Mortgage Lenders, there are now 1.1 million buy-to-let mortgages. There are also an uncountable number of BTL mortgages posing as regular owner-occupier loans.

Ten years ago, there were no virtually no BTL mortgages. With that explosion of volumes, in the major BTL lenders had virtually no internal fraud detection capacity. The middle class gangters took full advantage of this weakness.

In order for mortgage fraud to work; appraisers need to systematically overvalue house prices. This leads to an interesting question; to what extent did mortgage fraud contribute to housing inflation. My guess is that in the market for two-bedroom newly built apartments, fraud played a huge role in the run up in prices.

Let's face it. If you were daft enough to pay 150K+ for a one bed apartment (outside London) in the last year then you are probably a victim of this fraud or some sort of price fixing cartel by the builders and estate agents.

The fact that the B&B loan book has almost junk status is an indicator of just how widespread this fraud could have been.

I expect B&B to be nationalised which would mean huge bills for the UK taxpayers. I would knock the credentials of any company who takes over this dodgy debt in a merger.

There was a Panorama programme in the Spring about overvaluations in BTL. Not exactly fraud, but the developer 'gifted' deposits of 15% to late buyers. In this way he didn't have to drop his prices to shift his stock. Result: a mug buys a 200k flat for 'only' 170k with a 170k (85%) mortgage from an even bigger mug lender. The 200k is the price as recorded on the Land Registry. Amazingly, the solicitors for the lender never picked this 'gifting' of deposits up: apparently they will do so now.